Directors: Appointment, Qualification and Disqualification

Understand Directors: Appointment, Qualification and Disqualification

Key rules to remember

Minimum number of directors (s.149(1)(a))

Public company = 3; Private company = 2; One Person Company = 1

Maximum is 15 for all companies. More than 15 needs a special resolution.

Resident director (s.149(3))

At least one director who stays in India for not less than 182 days in the financial year

For a newly incorporated company, the requirement applies proportionately at the end of the year of incorporation.

Independent directors in listed public company (s.149(4))

At least 1/3 of total directors; any fraction is rounded off as one

Example: Board of 8 gives 8 ÷ 3 = 2.67, so 3 independent directors.

Term of independent director (s.149(10) and (11))

Up to 5 consecutive years per term; maximum 2 consecutive terms; cooling-off of 3 years

Re-appointment for a second term needs a special resolution and disclosure in the Board's report. During the 3 years he cannot be appointed in or associated with the company in any other capacity.

Declaration of independence (s.149(7))

At the first Board meeting he attends, then at the first meeting of every financial year, and whenever circumstances change

The declaration says that he meets the criteria of independence.

Disqualification: conviction (s.164(1)(d))

Imprisonment of 6 months or more, and 5 years not elapsed from the expiry of the sentence; if sentence is 7 years or more, disqualified in any company

The 7-year proviso has no time limit stated in the proviso itself. It bars appointment in any company.

Disqualification: unpaid calls (s.164(1)(f))

Calls unpaid and 6 months elapsed from the last day fixed for payment

Applies to shares of that company held alone or jointly.

Disqualification: default by company (s.164(2))

Director of a company that did not file financial statements or annual returns for 3 continuous financial years, or defaulted on deposits, debentures or dividend for 1 year or more: barred for 5 years

He cannot be re-appointed in that company or appointed in another company for 5 years. A person newly appointed to a defaulting company does not incur this disqualification for 6 months from appointment.

Other disqualifications under s.164(1)

Unsound mind declared by court; undischarged insolvent; pending insolvency application; disqualification order in force; s.188 conviction in last 5 years; non-compliance with s.152(3) or s.165(1)

Clauses (a), (b), (c), (e), (g), (h) and (i).

Additional disqualifications by private company (s.164(3))

A private company may by its articles provide for disqualifications in addition to those in s.164(1) and (2)

Separately, the proviso to s.164(3) says the disqualifications in clauses (d), (e) and (g) of s.164(1) continue to apply even if an appeal or petition is filed against the order of conviction or disqualification.

How to solve Directors: Appointment, Qualification and Disqualification questions

1. 1Read the facts and identify what is being asked: board size, type of director, eligibility, or disqualification.
2. 2Name the provision. Use section 149 for number, residency, woman and independent directors, and section 164 for disqualification.
3. 3State the rule in plain words with its exact conditions, such as numbers, time periods and the word 'continuous' or 'consecutive'.
4. 4Apply the rule to the facts. Do the arithmetic: count the years, months or directors, and round fractions where the Act says so.
5. 5Check for provisos and exceptions, such as the 7-year conviction proviso, the 6-month grace under section 164(2) and the proviso to section 164(3), which says the disqualifications in clauses (d), (e) and (g) of section 164(1) continue to apply even if an appeal or petition is filed.
6. 6Write a one-line conclusion that answers the exact question, for example 'Mr X is disqualified' or 'The company has complied'.

Quickest way: Clause-matching shortcut for MCQs and short answers

Common mistakes in Directors: Appointment, Qualification and Disqualification

• Writing that a person convicted of any offence is disqualified for 5 years.

  Students remember the 5-year period but forget the condition of imprisonment of at least 6 months.

  Fix: Check the sentence. A fine only, or imprisonment under 6 months, does not attract section 164(1)(d). The 5 years run from the expiry of the sentence.

• Treating the 7-year proviso as a 5-year bar.

  Students merge the main clause and the proviso.

  Fix: If the sentence is 7 years or more, the person is not eligible to be a director in any company. Read this as a separate rule.

• Rounding down the one-third independent director requirement.

  Students use ordinary rounding.

  Fix: The Explanation to section 149(4) says any fraction is rounded off as one. So 2.33 becomes 3 and 2.67 becomes 3.

• Applying the section 164(2) disqualification to a person immediately after joining a defaulting company.

  Students miss the proviso.

  Fix: A person appointed as director of a company already in default does not incur the disqualification for 6 months from the date of his appointment.

• Saying an appeal against conviction removes the disqualification in every company.

  Students confuse the general idea of appeals with the proviso to section 164(3).

  Fix: The proviso to section 164(3) says the disqualifications in clauses (d), (e) and (g) of sub-section (1) continue to apply even if an appeal or petition has been filed against the order.

• Saying a second term of an independent director needs only a board resolution.

  Students mix up the first appointment and re-appointment.

  Fix: Re-appointment for a further term needs a special resolution and disclosure in the Board's report. No independent director can hold office for more than two consecutive terms.

Worked examples